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What Every Founder/Entrepeneur Must Know (Series: The Start-Up/Small Business Advisor)

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What Every Founder/Entrepeneur Must Know (Series: The Start-Up/Small Business Advisor)

Congratulations. You are a founder of a company and you have just been given an hour to ask several experts anything you want about the subject. Some questions will certainly focus on IP, since intellectual property is so important to so many businesses. Some questions will touch on outsourcing- perhaps of manufacturing, perhaps of certain other functions. Formation, capital raising, and HR are also fair game. And since the panel includes two attorneys, you can be sure that the conversation will cover both the business and legal aspects of the various topics discussed. The panel will also discuss planning for incremental growth; and, while pandemic continues, the availability of PPP loans and governmental assistance.

To view the accompanying webinar, go to:https://www.financialpoise.com/financial-poise-webinars/what-every-founder-entrepreneur-must-know-2021/

Congratulations. You are a founder of a company and you have just been given an hour to ask several experts anything you want about the subject. Some questions will certainly focus on IP, since intellectual property is so important to so many businesses. Some questions will touch on outsourcing- perhaps of manufacturing, perhaps of certain other functions. Formation, capital raising, and HR are also fair game. And since the panel includes two attorneys, you can be sure that the conversation will cover both the business and legal aspects of the various topics discussed. The panel will also discuss planning for incremental growth; and, while pandemic continues, the availability of PPP loans and governmental assistance.

To view the accompanying webinar, go to:https://www.financialpoise.com/financial-poise-webinars/what-every-founder-entrepreneur-must-know-2021/

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What Every Founder/Entrepeneur Must Know (Series: The Start-Up/Small Business Advisor)

  1. 1. 1
  2. 2. 2 Practical and entertaining education for attorneys, accountants, business owners and executives, and investors.
  3. 3. Disclaimer The material in this webinar is for informational purposes only. It should not be considered legal, financial or other professional advice. You should consult with an attorney or other appropriate professional to determine what may be best for your individual needs. While Financial Poise™ takes reasonable steps to ensure that information it publishes is accurate, Financial Poise™ makes no guaranty in this regard. 3
  4. 4. Meet the Faculty MODERATOR: Robert Londin - Jaspan Schlesinger LLP PANELISTS: Leslee Cohen - Hershman Cohen LLC J. Richard Claywell - The Office of J. Richard Claywell David Spitulnik - Spitulnik Advisors 5
  5. 5. About This Webinar What Every Founder/Entrepreneur Must Know Congratulations. You are a founder of a company and you have just been given an hour to ask several experts anything you want about the subject. Some questions will certainly focus on IP, since intellectual property is so important to so many businesses. Some questions will touch on outsourcing- perhaps of manufacturing, perhaps of certain other functions. Formation, capital raising, and HR are also fair game. And since the panel includes two attorneys, you can be sure that the conversation will cover both the business and legal aspects of the various topics discussed. The panel will also discuss planning for incremental growth; and, while pandemic continues, the availability of PPP loans and governmental assistance. 6
  6. 6. About This Series Most startups are not destined to become billion dollar unicorns. Most, in fact, will fail and most of those that survive may never be more than small businesses. Whether and to what extent a startup will be successful depends on many factors. One set of factors is the foundational pillars on which the company is built, and includes things such as the company’s capital structure, financial controls, human capital, management/founder talent, market niche (and barrier to entry), financing growth, managing burn rate, and marketing functions. This series explores each of these topics, giving startups, entrepreneurs, and their advisors useful tools and insight into how they can build a foundation for success. As with every Financial Poise Webinar, each episode is delivered in Plain English understandable to investors, business owners, entrepreneurs, and executives without much background in these areas, yet is also valuable to attorneys, accountants, and other seasoned professionals. And, as with every Financial Poise Webinar, each episode brings you into engaging, sometimes humorous, conversations designed to entertain as it teaches. Each episode in the series is designed to be viewed independently of the other episodes so that participants will enhance their knowledge of this area whether they attend one, some, or all episodes. 7
  7. 7. Episodes in this Series #1: The Very Basics: Forming the Business Premiere date: 1/27/21 #2: Raising Capital: Negotiating with Potential Investors Premiere date: 2/24/21 #3: What Every Founder/Entrepreneur Must Know Premiere date: 3/31/21 8
  8. 8. Episode #3 What Every Founder/Entrepreneur Must Know 9
  9. 9. Forming an Entity • What’s the first thing a new business owner should do?  Form an entity • Why form an entity?  Limited liability (capped vs. unlimited)  With: The business owner is only at risk for the amount of their investment and none of the other obligations of the business  Without: The business owner is responsible for all of the business’ liabilities 10
  10. 10. Forming an Entity More Reasons to Form an Entity: • Interaction with third parties  Credibility with financing or other sources  May be demanded by third parties as a means of reducing potential liabilities • Flexibility and structure for management and control 11
  11. 11. Types of Legal Entities • The two most common forms of legal entities are:  Corporations  C or S-Corps  Limited Liability Companies (or LLCs) 12
  12. 12. Corporations • Corporations  There are two variations on the corporation (based on the way they are treated for tax purposes)  C-Corp  Unless you plan to raise venture capital or go public, you’ll likely want to stay away from the C-Corp…it’s earnings are taxed twice! 13
  13. 13. Corporations  S-Corp  Not subject to double taxation (pass-through entity)  Restrictions include (1) only individuals can be shareholders, (2) no more than 100 shareholders, (3) only U.S. persons can be shareholders, and (4) funds can only be divided between the shareholders “pro rata” (i.e., can’t have more than one class of stock) 14
  14. 14. Other Types of Corporations • Professional Corporations  Available, and typically mandatory, if forming a corporation, for certain professions (lawyers, doctors, accountants, etc.)  May not be able to limit individual liability, at least for malpractice actions, even if using • Statutory close corporations  Limitation on number of shareholders (35)  Flexible management structure such that a shareholder with much less than majority ownership may be able to control management  Fallen into disfavor in the LLC era? 15
  15. 15. Other Types of Corporations • Non-profit corporations  No profits distributed to shareholders  Limitations on purpose, use of funds, etc. • Co-operative corporations (consumers, agricultural, etc.) 16
  16. 16. Limited Liability Companies (LLCs) • LLCs offer, as their name suggests, limited liability like a corporation, taxation like a S corporation or a partnership, and do not have the restrictions on ownership of a S corporation • LLCs offer a flexible management structure such that they can either be operated by one, some or all of their members (the LLC equivalent of shareholders) or a manager or managers, who may or may not be members • Can have more than one class of membership interest (flexibility on structuring distributions and voting rights) 17
  17. 17. Limited Liability Companies (LLCs) • LLCs are formed by the filing of a certificate (or articles) of organization. • Their primary governing documents, which are not mandatory but are highly advisable, are known as operating agreements  Operating Agreements are similar to bylaws but often include additional provisions of governance and share transfer which may be included in a shareholder agreement of a corporation.  Operating agreements provide how distributions are made and how profit/losses are allocated among members 18
  18. 18. Limited Liability Companies (LLCs) • LLCs have become extremely popular for the advantages and flexibility they offer. • However, because of their relative newness and largely contractual nature:  LLCs offer less certainty, to both their members and outside entities dealing with them, than do corporations.  While LLCs are permitted to grant stock options, have more than one class of stock and do not generally have limitations on who can become members, there is enough haziness on these issues such that professional investors will generally prefer a C corporation; professional investors also prefer C corporations for tax planning reasons 19
  19. 19. Summary of Primary Entity Choices 20
  20. 20. Risk Management • Corporate counsel • Business licenses & registrations • Internal controls / policies & procedures • Insurance  D&O  Key Man  General Liability 21
  21. 21. Building a Team • Board of Directors vs. Board of Advisors • Resources needed (by function)  Business Development  Operations  Finance & Accounting (including Tax)  Legal  Human Resources • Employee vs. independent contractor (IC) • Focus on revenue generation (infrastructure lags revenue) 22
  22. 22. General HR Tips for Start-Ups • Act as a leader • Policies and training are just the start • Create and communicate values • Institutional values 23
  23. 23. Laws and Regulations (Federal) • Department of Labor  Wages & Hours  Workplace Safety  Workers’ Compensation  Employee Benefits, etc. 24
  24. 24. Talent Acquisition – Recruiting • Develop a recruiting plan • Identify vacancy and evaluate needs • Develop position description • Advertise position 25
  25. 25. Employment of Negotiations – Type of Employment • Status: Full Time v. Part Time • Classification: Exempt v. Non-Exempt • Independent Contractor 26
  26. 26. Employment of Negotiations – Type of Employment a. Full Time Employees vs. Independent Contractors b. Source: http://employment.findlaw.com/hiring-process/being-an-independent-contractor-vs-employee.html 27
  27. 27. Employment-Related Documents • Offer letter (outlining basic terms of employment and conditions to commencement of services) • Noncompete • Non-solicitation • Confidentiality 28
  28. 28. Employment-Related Documents • Noncompete Provisions  Terms restricting an employee’s ability to work for competitors for a specified amount of time (sometimes within a specified geographic area) after an employee leaves a company.  Often used to protect trade secrets or goodwill  Enforceability  Often restricted or unenforceable under state law.  Each state has its own unique laws and rules about whether, when and to what extent a non-compete agreement is enforceable.  Reasonableness of non-compete restrictions are often the key to enforceability! Duration and scope must be reasonable. 29
  29. 29. Employment-Related Documents • Non-Solicitation Provisions  Terms restricting employee’s ability to solicit company’s clients or customers for employee’s own benefit or benefit of another employer after leaving company.  May also include agreement not to solicit other employees to leave when exiting employee leaves.  Often used in service or sales businesses  Enforceability  Again – know the law in your state!  Where enforceable, must be drafted so that it is not too difficult for employee to earn a living or unfairly limit a competitor’s ability to hire workers or attract new customers  Valid business reason should/must exist for enforcing non-solicitation provisions 30
  30. 30. Employment of Negotiations – Employment Agreement • Confidentiality Provisions  Agreement prohibiting employee from disclosing company’s confidential or proprietary information.  Often effective during an employee’s time with company, and lasting for a period of time after employee leaves (1-3 years is common). 31
  31. 31. Outsourcing HR • Benefits  Frees employer to concentrate on core competencies  Saves money  Improves compliance  Improves recruitment  Provides access to latest tools and technology 32
  32. 32. Funding Your Business • Sources of Financing  Bootstrap  Friends & Family  Government  Angel Investors  Venture Capitalists  Commercial Banks 33
  33. 33. Funding Your Business • Select documents necessary to raise financing  Business Plan  Executive Summary  Management Team + Board of Directors (Advisors)  Market Size  Financial Projections  Business Formation Documents  Confidential Information Memorandum (CIM); Risk Factors  Contracts  Employment Agreements 34
  34. 34. Equity – Selling Ownership Interests • Individuals or firms provide money in exchange for an ownership percentage (shares, stock) in a company • May take numerous forms • Entails loss of some ownership to founders, but can be beneficial for startup that doesn’t expect to generate revenue sufficient to repay loans or reinvest in the company 35
  35. 35. Angel Investors • Equity-based investing by wealthy individuals • May be an industry executive or experienced businessperson able to provide guidance to company • May give company credibility to attract other investors. • Angels may work in organized groups to screen deals & invest with each other, while many invest on their own. 36
  36. 36. What Do Angels Want? • High growth and scalability • Thus software and tech, more than manufacturing • A market for the innovation, a moat against future competitors • Payoff (exit) in 5 to 10 years • To build their own brand to gain access to future deals 37
  37. 37. What Angels Have Gotten • 2.5x exit on average • 4.5 year average holding period for successful exits • 50% to 70% dilution when investing at seed stage [per Angel Resource Institute] • If initial valuation is $10 million and 50% - 70% dilution expected, then to reach 2.5x Angel investment, exit valuation should be $83 million, or 8.3x 38
  38. 38. Angel Batting Average • Lower than baseball batting averages • Many losers, but high returns from winners • Likely need for future investments rounds • Angels diversify their bets, and bet with funds they can afford to lose 39
  39. 39. Venture Capital • Investment firms willing to put forward a large sums of money in exchange for equity in the company • Financing typically conditioned on VC pulling money out after company is acquired or goes public. • VCs are professional investors seeking significant return on investment • Typically significant investment for potential exponential return on investment; these are targeted by VCs because of the significant time commitment required in the deal process 40
  40. 40. Dilution • First Founder(s) own 100% • Then seed funders and employees are distributed shares; Reserved Equity Plan/Awards • Then Angels purchase a percentage of total shares 41
  41. 41. Dilution • NOTE: With each of these steps, the ownership share of the predecessor owners is diluted • Venture Capital and other later funders are likely to insist on some control (e.g., a Board seat) an on preferential payouts in the event of a liquidation- these doubly dilute their predecessors [See Equity Investment Simulation at http://ownyourventure.com/equitySim.html] 42
  42. 42. Offering Process for Equity Securities • Offers and sales of equity securities must either be registered with the SEC and offered publicly or exempt from registration and offered privately • Pre-JOBS Act (2012), an investor must have been an accredited investor in order to participate in an exempt offering, and issuers of private equity securities were barred from engaging in general solicitation or advertising 43
  43. 43. Accredited Investors in Exempt Offerings – Who? • “Accredited investors” include natural persons who:  Possess a net worth (alone or with spouse) >$1 million (excluding value of home, and not counting home mortgage as a liability, unless it is underwater) or  Have an annual income >$200,000 (or joint income with spouse >$300,000) in the two most recent years, and reasonable expectation of similar or higher income in the current year 44
  44. 44. Investing in Private Equity Securities Pre-JOBS Act [Rule 506(b)] • Accredited investor has pre-existing, substantive relationship directly with issuer • AI has pre-existing, substantive relationship with an intermediary, such as a broker- dealer or investment advisor • AI purchases resold private equity shares in secondary markets 45
  45. 45. JOBS Act of 2012 (In Summary) • SEC’s prohibition on general solicitation and advertising eliminated in certain private offerings in which only accredited investors participate (Rule 506(c) and Title II) • In addition to pre-JOBS Act access via issuers and intermediaries with whom AIs had pre-existing substantive relationships, AIs can now invest in private equity securities via on-line investment platforms that advertise and engage in general solicitation 46
  46. 46. JOBS Act of 2012 (In Summary) • Accredited investors and the “crowd” of non-accredited investors will be able to invest in private equity securities via Title III (aka Reg CF) on-line “crowdfunding portals” (with annual investing limits keyed to income, net worth) • Accredited investors and non-accredited investors will be able to invest in private equity securities via Title IV (aka Reg A+) offering platforms (with annual investing limits keyed to income, net worth) 47
  47. 47. Common Documentation When Dealing With Investors • Term Sheets  Set out details of investor funding; come in a variety of forms depending on the round of funding addressed and investor involved. • Stock Purchase Agreements 48
  48. 48. Common Documentation When Dealing With Investors • Business Loan Agreements/Financing Agreements  Set forth terms of financing with lenders, length of loan, interest rates, conditions, etc • Personal Guaranty  Executed by startup owners to guarantee repayment of loan from personal assets in event of default by company 49
  49. 49. Common Documentation When Dealing With Investors • Convertible Notes  Short-term debt that automatically converts into equity upon future events in a company’s life, such as a later round of financing when a valuation is established; current practice is to use SAFE Agreements rather than convertible/bridge notes in early rounds of financing • Security Agreements  Involved with debt financing: lender is granted a secured interest in company’s assets, on which it can foreclose and sell in the event the company defaults on its loan obligations 50
  50. 50. About the Faculty 51
  51. 51. About The Faculty Robert Londin - rlondin@jaspanllp.com A partner in his firm’s Corporate and Commercial Transactions Group, Mr. Londin counsels numerous companies in connection with their mergers and acquisitions (both strategic and financial), financing needs and the execution of their business plans; financial concerns in capital markets transactions; emerging-growth companies; seed and venture capital clients in connection with the formation of their investment vehicles and making of their portfolio company investments; borrowers and lenders in secured financings; and companies and highly compensated executives in connection with their compensation and separation arrangements. Rob serves as general counsel to many clients and their senior executives and advisory boards. This general corporate representation covers day-to-day legal issues as well as strategic planning and business development extending to acquisition and financing concerns. He also represents technology and emerging-growth clients in connection with their strategic alliances, technology licensing, mergers and acquisitions, corporate finance, venture capital, banking transactions and general corporate needs. 52
  52. 52. About The Faculty Leslee Cohen - LCohen@hershco.com Leslee Cohen, Principal at Hershman Cohen, concentrates her transactional practice in securities law, corporate finance and general corporate law. She counsels a variety of entities, from small entrepreneurs and start-up companies to large established businesses, across many industries from real estate to technology in connection with private placements of both equity and debt securities, including venture capital, private equity and “friends and family” investments. Leslee also structures, negotiates and documents significant business transactions, including mergers and acquisitions, tender offers, joint ventures and other business combinations and financial transactions. In addition, she handles general corporate matters including commercial contract drafting and review, stockholder and limited liability company agreements and structuring, business restructurings, employment and consulting agreements, and equity incentive plans and agreements, on behalf of a diverse group of clients. Leslee’s practice encompasses Securities and Exchange Commission (SEC) compliance for microcap public companies and committees of their boards of directors, providing counseling regarding disclosure and regulatory obligations under the Securities Exchange Act of 1934 and the requirements of the Sarbanes-Oxley Act, including corporate governance, ethics and executive compensation issues. Leslee also represents broker-dealers and investment advisors in connection with securities law issues. 53
  53. 53. About The Faculty Richard Claywell - richard@biz-valuation.com Richard is a practicing Certified Public Accountant, and holds the additional designations of Accredited in Business Valuation, Accredited Senior Appraiser, Certified Business Appraiser, International Certified Valuation Specialist, Certified Valuation Analyst, Certified in Merger & Acquisition Advisor, Master Analyst in Financial Forensics, Certified in Fraud Deterrence, Accredited in Business Appraisal Review. Richard has been valuing closely held companies since 1985. Richard’s practice is restricted to business valuation, economic damages, profit enhancement and exit planning. Richard received his Bachelor of Science in Accounting in 1979 from the University of Houston – Clear Lake. He then received certification as a Public Accountant in 1983. Over the years, Richard has earned additional accreditations that relate to business valuations, economic damages and fraud. Richard has been an instructor for the National Association of Certified Valuation Analysts for many years, has been an instructor for the Internal Revenue Service and the International Association of Consultants Valuators and Analysts (IACVA). Richard is currently the Director of Education for the IACVA and is responsible for the business valuations materials being taught in 55 countries. Richard has taught business valuation or economic damage courses in China, Korea, Taiwan. Richard has performed over 1,000 business valuations since 1985. Richard has testified in Texas County Court, Texas State Court, Bankruptcy Court and Texas State Courts. Richard has given testimony in economic damages (lost profits), shareholder disputes, personal injury, wrongful termination and divorce. 54
  54. 54. About The Faculty David Spitulnik - dspitulnik@spitulnikadvisors.com David Spitulnik is a successful executive with over 40 years of experience in both large technology companies and in consulting to and leadership of mid-market, closely held and family owned businesses across a variety of industries. In addition to serving as chair of the Private Directors Association’s Private and Family Business Center Outreach Committee, David frequently writes and speaks on a number of topics related to leading, building, maintaining and strengthening businesses and their governance structures. Drawing from a broad range of experience in the United States and internationally, David is called upon to coach and mentor business leaders, to work with companies to develop and implement their long-range plans and to advise businesses on board creation, structure and effectiveness so that the individual, the board and the company can maintain powerful forward momentum. To read more, go to: https://www.financialpoise.com/webinar-faculty/david-spitulnik/ 55
  55. 55. Questions or Comments? If you have any questions about this webinar that you did not get to ask during the live premiere, or if you are watching this webinar On Demand, please do not hesitate to email us at info@financialpoise.com with any questions or comments you may have. Please include the name of the webinar in your email and we will do our best to provide a timely response. IMPORTANT NOTE: The material in this presentation is for general educational purposes only. It has been prepared primarily for attorneys and accountants for use in the pursuit of their continuing legal education and continuing professional education. 56
  56. 56. About Financial Poise 57 DailyDAC LLC, d/b/a Financial Poise™ provides continuing education to attorneys, accountants, business owners and executives, and investors. It’s websites, webinars, and books provide Plain English, entertaining, explanations about legal, financial, and other subjects of interest to these audiences. Visit us at www.financialpoise.com Our free weekly newsletter, Financial Poise Weekly, updates you on new articles published on our website and Upcoming Webinars you may be interested in. To join our email list, please visit: https://www.financialpoise.com/subscribe/

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